China’s change and challenge

Few nations have as much at stake in the leadership transition under way in the People’s Republic of China as Australia. Australia has benefited enormously from the industrial revolution that has been occurring since former paramount leader Deng Xiaoping began opening up the economy in the late 1970s.

In the past decade alone – since Beijing’s last stage­managed leadership transition from Jiang Zemin to
Hu Jintao
in 2002 – China has moved from being Australia’s fourth biggest export destination to our single largest market. With China now accounting for more than a quarter of Australia’s exports, our prosperity is tied more closely than ever to continued strong and stable growth in the Middle Kingdom.

China’s new leadership team under incoming president Xi Jinping and premier Li Keqiang remains just as committed to maintaining the nation’s economic ascendency as its predecessors. But Mr Xi and Mr Li and their eventual successors may find that driving China’s economic development over the coming decades – as well as governing a nation of 1.3 billion people – proves to be more difficult than in the past.

China’s economic success is empowering a new middle class whose younger members have next to no collective memory of the horrors suffered by the people during decades of political chaos, civil war and the insanity of Maoism.

Increasingly connected to the outside world and outside ideas by advances in technology, this affluent group has less allegiance to the one-party system of government that has prevailed in China since 1949. China’s economic onslaught over recent years has also led to growing income inequality, which has resulted in mass demonstrations against corrupt officials that would not have been tolerated in the past.

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The Chinese Communist Party has been able to manage its generational leadership transition and maintain stable government even if there have been some fissures in the system, as was evident in the Bo Xilai scandal and revelations about Premier Wen Jiabao’s controversial family fortune.

In his first appearance after his elevation to the top leadership spot yesterday, Mr Xi at least made the right noises about the need to clean up the corruption that has bedevilled the CCP in recent years. But the CCP must now confront other critical economic and social challenges facing China, some of which were outlined in The Australian Financial Review earlier this week in an article from our Chinese partner, Caixin, that country’s leading independent business media group.

Caixin says China needs to shift from manufacturing to innovation and from an investment-driven economy to one that is consumer driven, which will require reforms to its state-owned enterprises and the protection of intellectual property. China’s antiquated tax system also needs an overhaul, and controls over interest rates that are distorting investment away from the entrepreneurial private sector must be removed.

As part of its increasingly important role in the world economy, especially in the wake of the global financial crisis, China should get rid of the currency controls that are keeping the price of its manufacturing exports artificially low and adding to trade tensions.

There are more economists and fewer engineers in China’s new top leadership, so pursuing much-needed economic reforms may meet less resistance, although Beijing has an inherent aversion to dramatic change. Genuine political reform is likely to be even more elusive, even as the burgeoning middle classes begin to aspire to put their fate in their own hands rather than in the hands of self-appointed rulers.